Vitesco Technologies Group AG

XETRA:VTSC

Earnings Call Transcript 2022-Q2

[Heiko Eber, executive]

Ladies and gentlemen, I'm very happy to welcome you to our call on the financial results of the second quarter in 2022. The press release, the following presentation and our quarterly statement had been published today at 7 a.m. Central European Time on our Investor Relations website in the Reports and Presentations section. In addition, you can also find an overview of the most important KPIs on a quarterly basis available for your convenience on the website. We will also make, of course, this recording available afterwards.

Before we come to today's agenda, I'm sure you have all taken notice of our famous disclaimer. As you have seen in the invitation, Andreas Wolf, our CEO; and our CFO, Werner Volz, are here to guide you through our presentation of the financial results. And as always, they will report on the most important developments of the last quarter, the group and business unit development as well as our cash flow and balance sheet. Afterwards, both gentlemen will be available for a Q&A opportunity.

And now without further ado, let me hand over to our CEO, Andreas Wolf.

[Andreas Wolf, executive]

Yes. Thank you, Heiko, and thank you very much, ladies and gentlemen, for joining today. Another quarter is in the books, and it really was another challenging quarter that we had to manage, starting with the lockdowns in China, which led to a very weak month of April. And it just continued with ongoing semiconductor shortages, the war in Ukraine and precautionary measures we had to take to manage the potential gas shortage in Europe.

In this environment, we concluded another solid quarter with sales of almost EUR 2.2 billion and 1.5% adjusted EBIT margin. That means that we also made further progress regarding the increasing input cost and the pass-through to our customers. Also, the free cash flow was slightly positive even though we had increased our investments in the second quarter. Main drivers for the positive free cash flow were some one-off effects, especially in the working capital. And of course, we also made progress in our transformation towards electrification. We had EUR 235 million of electrification sales in quarter 2, amounting to a total electrification sales of EUR 0.5 billion in the first half of 2022.

In addition, we also managed to win some more significant orders in electrification, a total sum of EUR 3 billion in quarter 2 only. That means that more than 80% of our total order intake in quarter 2 are coming from the area of electrification. This does also include the EUR 1.7 billion battery management order intake which we have communicated already during the quarter 1 presentation. And we could also communicate our strategic partnership with Renault. You have certainly all seen the press release a couple of weeks ago. We will join forces in the development of a high-voltage One Box comprising the DC/DC converter, the onboard charger and the inverter. Our goal is to increase the compactness by 45% and be ready for serial development in the mid of the decade.

In addition, we will also start delivering our own high-voltage box, which combines the DC/DC converter and the OBC starting in 2025. A part of that awards volume is already included in the quarter 2 order intake figure. Further order wins should follow once we reach certain development milestones. As you can see, it was a very busy second quarter, but with plenty of good news for Vitesco Technologies.

Let us now dive a little bit deeper into the financial part of it. As I have mentioned already, we generated sales of EUR 2.165 billion, an increase of 3.3% compared to the previous year. Of course, there were 2 major effects, which massively contributed to that increase; FX of 5.4% and the price increases, which we could negotiate with our customers. Without these effects, we would have lost sales year-over-year, especially due to the China lockdowns.

The adjusted EBIT came in at 1.5%, still significantly influenced from the semiconductor shortages and increasing input costs, which especially burdened the business unit electronic controls. CapEx was at 5.2% of sales and I already mentioned the positive cash flow of close to EUR 2 million. Our equity ratio at the end of quarter 2 was at a very strong 40.4%.

If we now look at the development in light vehicle production, you can basically see the trend of the previous quarters continuing. Europe remains challenged and also China lost significant volumes due to the regional lockdowns, especially in April. Overall, the worldwide vehicle production was flat year-on-year. Our core technologies, we managed to outperform this flat market organically by 3.2 percentage points, mainly driven by the strong sales development in EC and SMA core technologies. At group level, however, we underperformed 1.4 percentage points compared to the light vehicle production, mainly because of our higher exposure to the weak European market.

And with that, Werner will now give you some more details and KPIs around our second quarter.

[Werner Volz, executive]

Yes. Thank you, Andreas, and hello and welcome also from my side. Andreas mentioned the key facts for the group already, and I just want to highlight on additional information to provide some more insight. And again, I would like to start at sales. The main driver for our sales increase to EUR 2.2 billion were currency effects of 5.4 percentage points, mainly from the strong U.S. dollar.

The second main effect were price increases, which we managed to negotiate with our customers and which at least partially compensated for higher input costs. On the negative side, I must especially highlight the volume, which could not be produced due to the lockdowns in China. Overall, we lost potential sales of more than EUR 150 million in April and May.

In addition, in Q2, we had to deal another time with additional gross costs, which amounted just in Q2 to around EUR 140 million from topics such as price increases in production material, energy and also freight. With our progress in our negotiations with our customers, we are still confident to achieve the targeted 80% cost recovery for the full year. The share of actual costs, which we passed on in Q2 has already slightly increased compared to Q1. As a result, our adjusted EBIT came in at EUR 33 million and a margin of 1.5%.

As already mentioned during our Q1 call in May, please keep in mind that we had a little more than EUR 15 million positive one-off effects in the quarter of the prior year accordingly, 2/3 of this in electronic controls, 1/3 in sensing and actuation.

Our margin without the ramp-up business in electrification technology in Q2 2022 was at 5.1%. Although not showing in my presentation, I would like also to address the positive earnings per share in the first half year. Part of that is attributable to windfall profits in deferred taxes coming from a revaluation of our pension liabilities besides the fact of our continuous improving our global tax situation.

But coming back to the operational business and talking about electrification technology now. Also here, we continue to suffer from global semiconductor shortages, which significantly helped back our production output. Overall, we reported flat sales year-over-year, especially due to a challenging European markets. Only our growth in China with our ET business could compensate for that.

If we look at the profitability, we continue to record a positive gross margin also in Q2, even though the input costs increased significantly. Upfront expenses related to our high order intake, especially in research and development were additional burdens and led to a significantly, slightly -- to a slightly decrease in adjusted EBIT of minus -- to minus EUR 70 million.

As in the previous quarters, order intake was the big positive news for electrification technology. Out of the EUR 3 billion electrification order intake, EUR 2.3 billion were reported in electrification technology. A large part of that was obviously related to the order for battery management systems, which we have already communicated in May.

Now I'm getting to Slide 9 and let us look now at business unit electronic controls. I think it's Slide 9. Yes. As in the previous quarters, the impact from material cost increases and lower sales had the highest impact in EC. As a result, the EUR 922 million of sales only translated into EUR 20 million of adjusted EBIT, a margin of 2.1% -- which is a margin of 2.1%. And since most cost increases are related to our core technologies, the margin here was even lower. However, we are starting to see some positive sales momentum, especially in Germany and North America. The exceptionally high profitability in EC's noncore technologies was mainly due to a one-off effect related to a closure of a warranty case, which led to an income of almost EUR 20 million in Q2.

Now on the next slide, we see sensing and actuation which, on the other hand, continues to navigate very well in these difficult waters. Of course, currency was a helping factor by 5.5%, but the main drivers for the strong profitability of 10% was the whole business unit -- for the whole business unit were solid demands in Germany and North America as well as reimbursements for higher input costs, which we could negotiate with our customers.

As a result, sensing and actuation core technologies performed well with an adjusted EBIT margin of 13.4% at EUR 673 million of sales. Once more, a very resilient quarter for sensing and actuation, which of course, also allows us to further finance our electrification strategy.

In our fourth business unit, contract manufacturing, we continued with the phaseout. Organically, sales went down by 4.2%, even though we saw higher sales from higher input costs, also in contract manufacturing, which we, of course, completely pass on with -- in higher prices towards Continental. In addition, also currency effects led to more than EUR 20 million higher sales in Q2 despite declining volumes.

The adjusted EBIT margin came in at 3%, in line with the bilateral productivity, which we agreed with Continental. And a reminder here at that stage, on a group level, this is still a [ watch ] since we purchased a similar amount from Continental, resulting in lower costs of goods sold in our business units, ET, EC and sensing and actuation.

Let me now get to the cash flow. Despite the lower profitability, we kept the operating cash flow on previous year's level. This was mainly due to some earlier-than-anticipated payments, which we received from some customers in a lower double-digit million euro range. As expected, we also saw a higher cash outflow from CapEx in Q2 compared to Q1, approaching now the targeted 6% of sales. This reminds that Q2 2021 was still heavily influenced by spin-off effects with Continental, which materialized mainly in the investing and financing cash flow back then.

Anyhow, our liquidity situation, which you can see on Slide 13 remains very comfortable. Despite the slight decrease in cash to EUR 810 million, we still hold liquidity reserves of more than billion 1.6 billion with no near-term refinancing need, I think this is important to know. Our net working capital has increased year-over-year to now 5% of sales, mainly driven by the elevated inventory levels. Our net debt ratio remained stable compared to Q1 at minus 0.5x net debt to adjusted EBITDA, and our equity ratio actually increased significantly to 40%. The main reason for this was the revaluation of pension obligations considering anticipated higher interest rates which resulted in an increase of OCI of around EUR 280 million compared to Q1 2022. So all in all, our balance sheet-related KPIs reconfirm again our robust and solid balance sheet structure.

Now finally, let us take a quick look at our guidance for the whole year of 2022. And here, I think the main message is that there is nothing new to be told. We can confirm both our guidance and the outlook for the worldwide light vehicle production. Despite the continuous challenging markets, we expect and we are confident to reach our targets. This is especially driven by supporting factors like for number one, currency; number two, our price negotiations; as well as number three, gradual improvements of the overall semiconductor availability, which we do already see and anticipate to continue for the second half of 2022.

And with that, I hope the line kept stable. I have reached the end of my part of the presentation. And Andreas and I are now looking forward to your questions. But first, back to Heiko, I guess.

[Heiko Eber, executive]

Thank you very much, Andreas. Thank you, Werner. And once again, apologies for the connection problem and, of course, for your patience. So as announced, we will now enter the Q&A part of today's session. [Operator Instructions] So operator, we are now ready to take on the first questions.

[Operator]

[Operator Instructions] Our first question comes from Jose Asumendi from JPMorgan.

[Jose Asumendi, analyst]

It's Jose from JPMorgan. A couple of questions, please. The first one, I would like to understand a bit better what you are seeing in terms of the ability to source semiconductors and whether the sourcing is becoming easier? Second, I would like to understand a bit better your view of the production outlook across different regions, mainly Europe and China, if you could share some thoughts there.

And the third topic, I see one of your key customers, Stellantis, they are going to be -- they are already in-sourcing their E-Powertrain. And at the same time, simultaneously, it is one of your largest clients. And on the other hand, you have also -- and congratulations on that, you are winning very strong orders in electrification. So how do we think about this transition in the next maybe year or 2 years where maybe you do some orders or sales momentum with one of your largest clients Stellantis? And on the other hand, you capitalized on the very strong order backlog.

[Andreas Wolf, executive]

Okay. I'm not sure whether I understood everything. Sorry for that. The line is not really stable here. Now looking to the -- I understood sourcing, but I think it's meant to how is the supply of the semiconductor in the second half of the year. I think Werner of course touched on that already. So we see improvements. That's why we are now excluding everything else positive for the second half of the year.

The other thing, which is also true is that we have some surprises with other components from time to time. But all in all, if I look to the situation, we see that what was already announced that increase in capacities, availability getting better, et cetera, can be seen for the second half and obviously then also looking into 2023.

Now looking to Europe and China, I think it's a little bit linked all to that. So assuming no further lockdowns, we see China on a positive trend because if I look to the first half year, with all those lockdowns, not only for the automotive industry, but also the supply of components and parts of the automotive supply industry that should all be a little bit better, so that all in all, the outlook should be flat or somehow compared to H1 first half year, maybe with a little bit of improvement. That's really, really hard to say.

And on the European side, so I mean, you saw that maybe on the slide Werner has shown and I think you referenced to it, we expect a slight growth of 3% to 5%. Now the question around Stellantis, I did not really get. We have strong business with Stellantis. But maybe you repeat it because I'm looking into the round. We are not sure whether we got it. If it's around in-sourcing?

[Jose Asumendi, analyst]

Yes, exactly. So there is difficulty sourcing the E-Powertrain and at the same time, you are -- they are one of your biggest customers. So I mean, I think it could represent maybe 10%, 15% of your sales within the electrification. So I'm trying to understand whether the business wins you're gaining, whether they will offset the potential decline in business you will have with Stellantis in the next 3 years.

[Andreas Wolf, executive]

Yes, got you. So first of all, this animal, in-sourcing, I have to repeat again that looking to the market and the massive growth, we have our own view of what is impossible on our customer side to in-source from a technological point of view, but also from a cash flow point of view because if all those forecasts come through, the increase in production of mainly battery electric vehicles, every cent is needed to be invested into production lines, et cetera.

And I'm not sure whether this money is really available also on our customer side. This is something we will also obviously cover then during the Capital Markets Day in October. And obviously, yes, if that would move into that direction at Stellantis, we can -- I don't say easily, but we can compensate this trend, yes. So that will not impact our top line.

[Jose Asumendi, analyst]

And 1 follow on for me. On the order book, on the business wins you have won, can you give some color on -- by region, maybe where have you won these orders or maybe by OEM? But maybe region will be helpful.

[Andreas Wolf, executive]

Yes. Jose, you know that we are not allowed to give customer names, if not, especially given the okay. But the answer is very simple, in all product fields, with basically all customers in all regions of the world. That's a bold statement, I know, but that's where we are currently.

[Operator]

Christoph Laskawi from Deutsche Bank.

[Christoph Laskawi, analyst]

The first one would be on potential outlook on order intake. You have been very strong in H1 already. Do you see the same amount of RFQs in the market? And would you assume the same win rate? Or should we expect most of the RFQs for '22 to be done already and it should be -- follow amount later in the year and I guess, in H1 '23, we should expect a further uptick again. That will be the first.

And then -- we've seen other competitors emerging in especially 800 volt SiC inverters. It seems that the market is getting a bit more crowded there. Do you see an increasing number of competition as well and sitting on the table when you discuss with OEMs? Or is the market largely unchanged from where you had it?

And then just last question. On ET, is there a way -- because you mentioned that the revenue growth was weighed down by Semi availability that you could potentially allocate from other divisions to ET and support growth going forward? Or are the services that you use in that division very different from the others, so that there's no allocation possible.

[Andreas Wolf, executive]

Maybe I'll start with the third one, then the second one and then the first question. So if wished by our customers, and assuming we have the same component in an electrification product or in a product for a combustion engine, yes, we reallocate, inside a given volume for our customers. So we have really daily calls, twice, 3 times a week calls where we look into how we can best use the components on hand. But in many cases, it's not just a plug-and-play component we can use here or there. So it's a bit more difficult. But as I said, in agreement with our customers, we can do so, also understanding that average consumption is important for -- to avoid any fines, et cetera. Yes, we do that. But if a single component, which is a specific component to an inverter or so is not available, then we have no chance to reallocate.

Now the number 2, competition increasing, yes, there are smaller companies trying to enter that field because now after a couple of years, obviously, everybody understood that, that's the playing ground where you have to be. If you're not in, then you're out and they come with good ideas in PowerPoint, but they don't have the experience we have in the area of 800-volt applications and SiC.

We see the -- and I think we discussed the point also during Q1 Q&A, we see basically the same number of competitors, which are able to develop and produce those huge volumes on a worldwide scale. And I can only repeat that the experience we have more than 3 million cars on the road gives us tailwind in the sense of, we are strong and robust, and we have the trust of our customers that we make it because if the inverter is not working, then you can't sell the car. So therefore, I see the normal suspects around me, but not tons of competitors.

Now the order intake. I can only also again repeat what I have said. It's not that we are now stopping to -- or that the market stops to ask suppliers to quote. So we continue to see significant order intake also in the second half of 2022. And I also assume that huge order intake will be out and possible for us in 2023.

The market is not slowing down. And if you look to the overall increase in the share of battery electric vehicles or plug-in hybrids, et cetera, over the next years, it is natural to assume that the overall volume and RFQs, which will be sent out will not decline. So the momentum continues, and we will continue to make -- to get a large share of those orders also in the second half of the year. Did I answer your question?

[Christoph Laskawi, analyst]

Yes, you did. Just one followup, if I may. Is there a certain -- I mean, there must be a certain limit of orders that we can take on. But for now and with the possibility to scale up the business towards mid of the decade, there's not a cap, which we should assume for your order intake in the next 2 years at least at this point?

[Andreas Wolf, executive]

Yes, that's a little bit more complex. It's a very good and it sounds like an easy question. My answer can be very complex, but I try to make it simple. We carefully watch that on one hand, we get all the orders in, which are interesting for us and which pave the way towards our growth plans for the outer years. On the other hand, we also don't want to overdo it in the sense of not being able to deliver, means we want to run those projects we get from our customers seamlessly so that they are happy to work with Vitesco technologies. And that's a little bit the -- how can I say, the optimum we have to achieve but we obviously plan significant order intake also for 2023. Christoph, is that answering your question, your follow-up question?

[Christoph Laskawi, analyst]

It is.

[Operator]

Giulio Pescatore, Exane BNP Paribas.

[Giulio Pescatore, analyst]

The first one on energy risk in Europe. I think you mentioned that you have started preparation for potentially facing the shortages of energy. Can you maybe outlay what preparations are you doing? And how are you planning to offset this risk or face this risk?

Then the second one the one-off from the warranty case. Did I misunderstood it? Or there was a EUR 20 million positive effect on adjusted EBIT for -- in Q2 this year? And if that's the case, was that included in the guidance and expected? Then maybe 1 last question on the contract with Renault, a very interesting contract, well done on the win. But it's interesting to see that Renault will in-source production of this product for its BVs while leaving to you the production for the plug-in hybrid vehicles. Why do you think they've decided to go down that route and what is driving that?

[Andreas Wolf, executive]

Yes. Let's switch one to Renault, I'll start. First one was around energy weakness in Europe and how are we prepared. So when we talk about gas, the simple answer would be we don't use gas in our production processes. We are using gas for heating purposes only. So it's nothing where we feel threatened. The threat comes more from the fact that gas is used for other industries and those industries are important for the automotive market, like glass, steel and so on. So we would be indirectly hit. I think that that's basically answering your question.

Somehow things like we have seen also with the Ukraine war where we are not directly involved, but indirectly when other competitors or the OEMs are not able to build their cars.

[Giulio Pescatore, analyst]

Followup on -- sorry, I just wanted to follow up on this. Thanks for sharing that. Can you just maybe share also your views on what could happen in Germany? I mean, just I know that it is very difficult to predict, but just your high-level views on what could be the impact on the supply chain on the industry in general, if we do go into a situation of energy shortages would be super interesting for us. And I know it's very difficult to predict, but yes.

[Andreas Wolf, executive]

Yes, that's exactly the problem because that's a little bit of crystal ball. Nobody knows. I know that on European level, there was this agreement of helping out each other. That helps a lot because obviously, the situation of Germany is quite different from the situation of Spain and so on, but we will have the chance as European community to use gas of the community itself. So that will help a lot. What will exactly happen if that comes through is not known so far. It's a little bit of speculation, as you already included in your answer.

Now I would go to the third one and maybe Werner can talk about the warranty case. Yes, I mean there is the wish to in-source parts of the electrification product field from Renault. But it's also very clear that, as I mentioned before, if all that comes -- so the increase in production of battery electric vehicles, everybody needs each single cent to be invested into their own lines, means car production lines and the split between who does what, which value at, will be defined in the outer years.

So therefore, we see that extremely positive that, I mean, very simply speaking, Renault, starting 2025, when we talk high-voltage applications, it comes from us. Whether everything will be produced by us or not, we will see later. And maybe with that, Werner, can you briefly elaborate on the warranty case?

[Werner Volz, executive]

I guess. Yes. Giulio, I guess your question was what was it about? And I think the last point, if I call it right, was related to our guidance. But it is an older warranty case that we had for injection systems. And well, due to certain technical measures, but also in negotiations with our customers, we were able to close that on a lower level, which resulted in these roughly EUR 20 million additional benefits that we were able to now show in the second quarter.

And with regard to our guidance, it would be included in our guidance, obviously. And since we provide a range for our bottom line, yes, it is included. Was that your question, Giulio? Or is there anything else I can?

[Giulio Pescatore, analyst]

So you were expecting this EUR 20 million in your guidance at the start of the year?

[Werner Volz, executive]

Yes.

[Operator]

We will now move to our next question from Michael Jacks from Bank of America.

[Michael Jacks, analyst]

My first one is just going back on production outlook. As I'm sure you're aware, like last week, one of your U.S. peers cut its guidance, specifically downgrading its outlook for Europe to negative 5% year-on-year for 2022 on reduced production schedules. Can you perhaps give us some insights into the underlying trend that you're seeing in your customer production schedules over the past 2 months, whether there's been an upward, downward movement or if it stayed the same?

And then my second question relates to energy as well as followup there. Firstly, how exposed is Vitesco to spot electricity and gas prices for the remainder of 2022? And how should we think about it going into '23?

[Andreas Wolf, executive]

So maybe I'll start with your first question, Michael, and Werner will talk a little bit about energy spot market and so on, and's while I speak, he has the time to prepare himself. For the outlook, it's really difficult because the underlying assumption from us is that, as I said before, availability of Semis will be better. And assuming so, the outlook in Europe is at something between 3% and 5%.

Now what is not included is, I don't know, a second war in Europe or aggressive momentums around Taiwan. That's obviously not included. So this would obviously then also lead to a new forecast for the production outlook, especially in Europe. So we saw that Aptiv was a bit more negative or more super conservative. We don't see that in the same way. It's a little bit of speculation on all sides, but we are more on the positive side, looking also to the -- especially to the availability of component supply.

[Michael Jacks, analyst]

So OEMs haven't reduced their schedules in the last month from what you can see?

[Andreas Wolf, executive]

We don't see reductions of call offs. So we could deliver by far more slow down as that by availability of Semis at the end. And maybe 1 additional point, which is not always reflected completely is that the supply chains -- all supply chains worldwide are completely empty. There are no cars on stock. There's no inventory available of those critical components. So we could just produce another -- I mean, that's a little bit of also assumption now another months or 1 month just to refill or even more to refill the pipeline. Therefore, we are still on the realistic positive side. And with that, energy-wise [indiscernible] answer.

[Werner Volz, executive]

I'm always prepared. But just getting back to this energy question, and just as a general information, well, of course, we are suffering from significant increases in energy costs overall on a year-over-year basis. So just as a reference, RMG cost increased by roughly 30%. But since that is basically driven by energy increases in Europe, I think I would like to focus my answer on Europe.

And here, we have -- the general answer is here we basically are covered in all our plants and all our countries by long-term contracts that we have with utility suppliers. And to this extent we -- of course, we were suffering from the general energy cost increases, but we're not really exposed to spot prices in the energy market. Is that answering, Michael?

[Michael Jacks, analyst]

Yes. Maybe just asking in a more specific way. Obviously, you are exposed to some degree of increase in underlying prices given the 30% increase that you've experienced year-to-date. How does that look relative to the increase in market-related energy prices? How much of the underlying increase in market energy prices are you absorbing versus your suppliers?

[Werner Volz, executive]

I'm not sure whether I got your question. The line is not really that good, sorry.

[Michael Jacks, analyst]

No problem. Let me try to ask it in a different way. Spot energy prices year-to-date are up significantly more. The fact that your costs are up 30% year-on-year means that you are having to cover some of that underlying increase. So just wondering how much of the underlying energy cost increase your suppliers are passing on to you.

[Andreas Wolf, executive]

If we look to the energy part of the cost increase is coming from our suppliers, I'm not sure, but if you talk about the component suppliers, it's already built in...

[Michael Jacks, analyst]

Sorry, just to be clear, I'm speaking specifically about the energy cost itself. So your direct payments for electricity and gas.

[Andreas Wolf, executive]

I think we have to take that afterwards because we don't really understand where you want to go. I mean if you talk energy price level for getting energy from the energy suppliers? Or is it the energy cost part of a component which will be covered by the material price increases, which are already factored in, maybe we can have a short -- maybe we can add a followup on it afterwards.

[Operator]

Sanjay Bhagwani, Citi.

[Sanjay Bhagwani, analyst]

I have a couple. My first one is just coming back to Renault. So if I understand this correctly, you are co-developing One Box which is basically integrating the housing of the on-board charger, DC/DC converter and inverter, all 3 of these. And as it stands now, Renault will be leveraging your on-board charger and DC/DC converter, but still continue to source the inverters from competitors of yours.

So I just wanted to understand that given the purpose of this whole One Box is to make the -- reduce the weight and increase the efficiency of the vehicle. How important is that these all 3 components come from single supplier? And second, what are the development milestones after which you feel like Renault could also award you for the inverter component of this 3-in-1 box. That is my first question, and I'll follow up with the next one after.

[Andreas Wolf, executive]

Yes. I mean our audio line is extremely weak. So it's hard to really answer. So first of all, when talking about Renault, and I hope that I captured it correctly, we are talking about 2 products. There is a co-development of a 3-in-1 product. It's called One Box. And this new product has those efficiency gains, a reduction in size, reduction in weight, et cetera, which will see the light in the mid of this decade.

But that's where we are codeveloping and really physically sitting together with Renault and working with them to have the best and most efficient and most cost-wide best product of the world. That's one thing. The other thing is that the existing products, easily speaking, will already -- and that's where we have already order intake where the inverter is not integrated. It is the DC plus the on-board charger. And both products somehow pave our way to make step-by-step more sales with Renault.

So over time, there will be a situation where depending on whether we talk about the battery electric vehicle side or the plugin side that one or the other product will have higher or lower sales, but we will see that step by step. Anyhow, our assumption is that going into the second half of the decade, the battery electric vehicle will be from a technology point of view, the one which is the mainstream. So as often said, the plug-in hybrids and also 48-volt applications are bridge technologies, and we build our cases always around a long-term sustainable business case focusing on battery electric vehicles. Is that answering your question?

[Sanjay Bhagwani, analyst]

Yes. Maybe just so on the first one, you mentioned 3-in-1 products. So who is going to be supplying these 3 products? So when you basically co-develop, what sort of value is coming, let's say, for inverter, DC/DC converter and on-board chargers from Vitesco. Is it like DC components are going from Vitesco and integration is taking place at Renault? Is that fair to say? Or just 2 of these components are going and the third one may go from Vitesco.

[Andreas Wolf, executive]

Yes, it's an interesting question because this is not finally defined because we want to work together. We know that everything which is high voltage applications will come from us. And the final work split, I mean we talk mid of the decade, are we delivering components, are we delivering the full product, what is the share of deliveries between components and the full product is not finally defined. But it's clear that -- for me, it is clear that there will be a large portion of production also for us.

[Sanjay Bhagwani, analyst]

And what are the next milestones for -- to get some more color on this, for example, in 3-in-1 product, what -- this is basically on the order side, like because if you, let's say, if there is a conclusion that you provide these 3 high voyage products, then I imagine more updates to come on the order book?

[Andreas Wolf, executive]

Yes, the assumption is correct. So there are some milestones. I don't have them now here with me, but clearly targeting, again, also mid of the decade start of production. And once specific key milestones are met, this will then also be linked to additional order intake. So we will report out when that happens. And we can obviously do that also publicly because also the corporation was public and no doubt about it. But it will step-by-step be clear what is the exact order intake linked to it once we met those important milestones.

[Sanjay Bhagwani, analyst]

And then there will be a possibility to reach out to Nissan and Mitsubishi as well given they all are developing these products together?

[Andreas Wolf, executive]

Yes. That's a very clever hint on your side. It's somehow the start of a long journey, I would say. We are well aware of Renault, and we are happy to have that contract with Renault, but you mentioned already that Nissan is behind and also Mitsubishi can behind. But let's start and make a good job for Renault. And while we are working and meeting milestones, I could imagine that Nissan and Mitsubishi might also be very interested to work with us.

[Sanjay Bhagwani, analyst]

That is very helpful. And my final question is more on the financial side. So on the cost recovery, how is it working with SMA, which seems to be like facing lower cost headwinds and the recovery is higher versus electronic controls. Can you please provide some more color what is driving these -- like additional -- like steps in differentiating the cost itself and the recovery between these business units?

[Werner Volz, executive]

Well, maybe I can take that question, and I'll try to explain it with their product portfolio. I think this is some of the basic things we have to understand in this context, Sanjay. There is -- it is sensors and it is actuators. And of course, there are also electronic components included. But we do not see the specific electronic components like, for instance, ASICs, which is very predominant in the EC business, but also starting now in the ET business.

So even though, they are also directly impacted from the overall supply chain situation and not that specifically negatively impacted as the other 2 business units. And on the other side, with their products, and I would call it with their market position, which they have in certain product areas to be really, really with difference to other competitors, number one. They also are first, to be able to carry on price increases into the market. I think that's in a nutshell, the basic success story that we have here in sensing and actuation.

So one side, not that heavily being exposed to these negative effects coming from electronics. On the other side, having really strong market position. They are also able to allocate price increases easier into the market than probably other business units at this stage.

[Sanjay Bhagwani, analyst]

Yes. That's very helpful. So is there like -- let's say, looking in the next year and the year after, is there anything structurally changing with EC core tech if, let's say, these ASICs and these microcontrollers continue to, like say the price of that go up. How would you see? Because this thing -- this division makes margins of somewhere around 8% to 10%. And in quarter 2, we are at 1%. So how should we think of this? Is there any structural change here?

[Andreas Wolf, executive]

I would expect that already second half of 2022 will improve because the full effect of passing through the cost -- material cost increases on the semi side also, that's mainly on the semi side for the business unit, electronic controls is planned to take place in 2022 second half. So we should see an improvement of the performance. As you correctly say, with the 1% or 2%, that's not the performance we have seen in the past.

Now in 2023, the clear goal is to basically stabilize on a comparable old level, higher level because this is also important. It's not -- it's -- we are not talking about onetime payments or so for those products, but we are talking about real price increases, which then would also carry forward into '23 and onwards.

[Operator]

We will now take our next question from Philipp Konig from Goldman Sachs.

[Philipp Konig, analyst]

I just wanted to come back on the pricing recoveries. I know that you already provided a lot of color. I just wanted to sort of gauge how the recoveries or how the negotiations have gone so far. If you sort of look back when you set up the guidance for the year, has it been -- has the feedback been or has the progress been more positive? Has it been a little bit more slow? Has it been in line with what you expected and what you set yourself for the year?

And then my second question is on the EV powertrain market as it pertains to new entrants into the EV space. Are those also already customers? So thinking about new entrants that want to grow very quickly, but don't have access to their own technology that you could provide with the whole system. Are you in negotiation with any of those names? Any color there would also be very helpful.

[Andreas Wolf, executive]

Maybe on the price recovery side, it is in line with our expectations. Obviously, there are differences customer by customer. I can also, with all respect, say that those negotiations are running in a very creative cooperative way. And therefore, we have no reason to change our outlook of the expected 80% coverage of costs we can pass on. And therefore, no big disappointments, no big changes, positive changes. It's in line with what we thought is possible.

On the Powertrain market, new OEMs, yes, we are close to those new customers. We have even specific resources focusing on the DMGs. They come with new technologies. We have also with one or the other already contracts, won contracts. We are really looking into those new customers. But we also know that the traditional ones, so to say, have huge volumes. And we have, how can I say, a certain criteria to rank those possible orders, and there are some, obviously, with new entries into that market, but there's also those heavy weights where we talk about EUR 2 billion order intakes, et cetera, and it's sometimes even more, which is also very attractive.

So we try to really weigh arguments and using a set of KPIs to decide whether we also take in the specific orders from new customers on the DMG side, and this is true for the U.S. and then also mainly for China.

[Philipp Konig, analyst]

Can I just quickly follow up on the recoveries? Once you fit at 80%, which is a target that you've set yourself for the remaining 20%, is that then something that you think about negotiating on top of that maybe into 2023? Or do you just feel it's more realistic that you will get back to 80% and maybe the remaining 20% is something that you will have to pay for?

[Andreas Wolf, executive]

My view is that this type of price adjustments will continue. So it's not a 1 wave, and then it's over. Work stream, it is more that it is the first 80% to be precise now, but we see additional cost inflation here and there, and we will continue to work with the same spirit with our customers to always adjust accordingly our prices.

[Operator]

Edoardo Spina, HSBC.

[Edoardo Spina, analyst]

Thank you for taking my followup question on the pricing. That for all the details that you provided. I just wanted to clarify perhaps on the scope of these price negotiations. If you can help us to understand, I suppose raw materials are definitely included in this, but is energy also part of the equation? And finally, on the labor cost, I think usually, these are recovered through productivity gains by the suppliers. But now labor cost could be exceptionally high. Are you able to include the labor and other fixed costs in your negotiation with the carmakers? Or do you need to go to price new products at a higher level?

[Andreas Wolf, executive]

Yes. So first of all, it's true. It was a rule in the automotive supply industry that cost increases should be covered and netted by efficiency gains of the supplier. That's true. That was the past. That's no longer true now because now with the cost increases we see, we cannot basically eliminate those cost increases with our productivity. That's not working. So to -- and then also answer your -- the first part of your question, Edoardo, is we started the first wave with focusing on the semiconductors, price increases, raw material increases and so on, in some cases, also premium freight costs, which we have seen.

And as I said before also, to fill it we continue to monitor our situation, be it on the energy side, be it on cost increases, other cost increases. And if they are going beyond a certain threshold, which we can really compensate with productivity gains, we have to go back to our customers and ask for further price increases to be very precise. There's no other way.

[Operator]

With this, I'd like to hand the call back over to Heiko for any additional or closing remarks. Over to you, sir.

[Heiko Eber, executive]

Thank you very much. So since I guess we have no further questions in the queue, I would, first of all, like to thank you all for your time and your interest that you were bearing with us despite the little connection problem. So thank you very much for this.

Before I close today's call, as always, if there are more questions coming to your mind afterwards, feel free to give a call to [ Jen ] or myself. And also, as a reminder, even it was mentioned already before, we will host our Capital Markets Day on October 11 and of course, very much looking forward meeting you there. So I hope that you all have the chance to recharge a bit after the Q2 reporting season. So I wish you on behalf of everybody here in the room, some relaxing days. Speak to you soon. Bye-bye, and have a good one.